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Money and Information

  • Aleksander Berentsen
  • Guillaume Rocheteau

This paper investigates the role of fiat money in decentralized markets, where producers have private information about the quality of the goods they supply. Money is divisible, terms of trade are determined endogenously, and agents can finance their consumption with money or with real production. When the fraction of high quality producers in the economy is given, money promotes the production of high-quality goods, which improves the quality mix and welfare unambiguously. When this fraction is endogenous, however, we find that money can be valued even though it decreases welfare relative to the barter equilibrium. The origin of this ine .ciency is that money provides consumption insurance to low-quality producers, which can result in a higher fraction of low-quality producers in the monetary equilibrium. Finally, we find that most often agents acquire more information in the monetary equilibrium. Consequently, money is welfare-enhancing because it promotes useful production and exchange, but not because it saves information costs.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 099.

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Handle: RePEc:zur:iewwpx:099
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  1. Albrecht Ritschl & Ulrich Woitek, 2000. "Did Monetary Forces Cause the Great Depression? A Bayesian VAR Analysis for the U.S. Economy," Working Papers 2000_07, Business School - Economics, University of Glasgow.
  2. Amir, Rabah & Evstigneev, Igor V. & Hens, Thorsten & Schenk-Hoppe, Klaus Reiner, 2005. "Market selection and survival of investment strategies," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 105-122, February.
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  4. Lars P. Feld & Bruno S. Frey, . "Trust Breeds Trust: How Taxpayers are Treated," IEW - Working Papers 098, Institute for Empirical Research in Economics - University of Zurich.
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  7. Tsunao Okumura, 2005. "Wealth as a Signal in the Search Model of Money," Discussion Papers 1401, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  14. Simon G�chter & Armin Falk, . "Work motivation, institutions, and performance," IEW - Working Papers 062, Institute for Empirical Research in Economics - University of Zurich.
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  16. Falk, Armin & Fehr, Ernst & Fischbacher, Urs, 2008. "Testing theories of fairness--Intentions matter," Games and Economic Behavior, Elsevier, vol. 62(1), pages 287-303, January.
  17. Leonard J. Mirman & Klaus Reiner Schenk-HoppÈ, 2003. "Financial Markets and Stochastic Growth," Review of International Economics, Wiley Blackwell, vol. 11(2), pages 219-236, 05.
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  19. Bruno S. Frey & Alois Stutzer, 2001. "Beyond Bentham – Measuring Procedural Utility," CESifo Working Paper Series 492, CESifo Group Munich.
  20. Peter A.G. VanBergeijk & Jan Marc Berk, . "The Lucas Critique in Practice: An Empirical Investigation of the Impact of European Monetary Integration on the Term Structure," IEW - Working Papers 082, Institute for Empirical Research in Economics - University of Zurich.
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